Ebook - Business at a crossroads

Ebook - Business at a crossroads

Business at a

Crossroads

the Crisis of Corporate Leadership

Tom Lloyd

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10 9 8 7 6 5 4 3 2 1

19 18 17 16 15 14 13 12 11 10 Printed and bound in Great Britain by CPI Antony Rowe, Chippenham and Eastbourne

friends, Peter Bielby and Ray Heath

Self-respect is a primary good 17

From mercantilism to capitalism 39

3 The steam-age corporation 51

TARP restrictions on executive pay 79

The buck and the bucks stop here 102

The management ideas market 107The CEO as principal and conductor 109

Fortunes from good fortune 114

PART II Reforming big business 121

Stewards, seeders, guardians 142

Box: Semco’s steps to democracy 193

This book has been germinating for several years during which time the

way I see business has been influenced by many people They include

two “turnips,” as my wife calls them (they’re Swedes), my friends and

ex-colleagues, Karl-Erik Sveiby and Ronald Fagerfjall, John Curtis,

Andrew Bull, Anne Murphy, Jon May, Anne Deering, Tony Rowland,

Danny Barr, James Ramsden, Mike Hainsworth, Adrian Pryce, Richard

Miller, Peter McAllum, Peter Robinson, and David Hurst Thanks to all

of you for the stimulating conversations that have led me to conclusions

some of you will, no doubt, disagree with

A number of other people have helped me to put what I have learned

into the words that follow by contributing ideas and reviewing and

criticizing drafts They include Peter Duffy, Rich Foggio, Vince Darley,

John McNulty, John Stansell, and Neil Marshman Very special thanks

go to my two most diligent and helpful reviewers, James Page and

Antonie Reichling

Thanks also to Palgrave Macmillan’s Stephen Rutt, for taking a

chance with the book, and his colleague Eleanor Davey Corrigan, for

her helpful comments and guidance

I would also like to thank Rose Lewis for her light and accurate

editing

The evolution of the liberal capitalist system ground to a halt in 2007–

08 The default of the apocryphal subprime mortgage borrower in

America’s mid-west, a mere flutter of butterfly wings, caused a

hurri-cane of fear to rage through the securitized debt markets and sent the

world’s banking system into cardiac arrest

With the help of blood transfusions from central banks, the system

regained a semblance of life, but emerged from the trauma a pale

shadow of its former self The hunger for ever riskier lending was

trans-formed into extreme risk aversion Banks, fearing their peers were even

more exposed than themselves to the subprime securities market,

stopped lending to each other and lenders dependent on the interbank

market collapsed

When the troubles spread to Main Street a bonfire of all Wall Street’s

vanities engulfed “the Masters of the Universe,” as novelist Tom Wolfe

had dubbed investment bankers and securities dealers at the time of a

less dramatic crash two decades earlier What were they thinking? That

“securitizing” loans to people on welfare made them less risky? That

making a market in risk and moving it about would reduce its virulence?

That the magic wand of economic growth would transform sows’ ears

of subprime debt into prime silk purses?

In the firestorm of recrimination and accusation that followed the

crash, the trust ordinary people had in the powers that be – those who

had been running the liberal capitalist system, company chief executive

officers (CEOs) and their Wall Street allies – and their tolerance of their

astronomical pay packets, were consumed

The system was broken Its fragility was exposed There was a flaw in

the complicated array of risk management devices and securities those

erstwhile masters of the universe had designed to juggle the gravely

mis-measured risks of their lending binge

Perhaps there was a flaw in liberal capitalism itself

It was up to governments and central banks, which were held partly

to blame for what, with hindsight, was seen as their reckless

deregula-tion of financial markets before the crash, to deliver first aid It is up to

us, the ultimate architects of political-economic systems, to decide the

kind of society we want to live in, and the kinds of organization we want

to work for

A vote, whether cast with hands or feet, is no small thing, and at a time

like the present, when long-held beliefs and previously unquestioned

assumptions can no longer be taken for granted, a vote becomes a very

large thing In choosing political parties, by ticking boxes, and choosing

the kinds of organization we work for, by walking away from some and

toward others, we can reshape our society and its institutions

Let us choose reform and restoration The alternative is too awful to

contemplate I fear Yeats’s Second Coming; the second coming of socialism

The return, to the political debate, of Marx’s “blank and pitiless” slogan:

“From each according to his ability, to each according to his need.”

It would be a rational choice in many ways The system that failed

was manifestly unfair It was producing gross and rapidly growing

inequalities Ordinary people were already bemused and angered by the

huge sums paid to hedge fund managers, investment bankers and CEOs

before the crash They were incensed by the enormous “golden

para-chutes” paid to the ex-CEOs whose strategies had contributed to the

meltdown They became apoplectic when, faute de mieux, their money

had to be used to rescue the banks that had precipitated the crisis

The financial crisis also exposed a profoundly unfair asymmetry in

the system In a rising market, bank lending magnifies gains which

enrich a few hedge fund managers, investment bankers and top level

executives But in a falling market, it magnifies losses which are carried

by everyone when banks are bailed out by the taxpayer In this way,

boom and bust act like an inequality ratchet Gains during the boom are

captured by the privileged few, losses during the bust are paid for by

everyone and, cycle after cycle, inequality grows

For voters made aware by the bailout that they have been played as

mugs in a classic “heads I win, tails you lose” game, it would be folly to

allow the game to continue, and rational to substitute neo-socialism for

the liberal capitalism that had, supposedly, led to the unfairness

Rational, but not reasonable

Something must clearly be done about this unfairness, but to blame

liberal capitalism for the inequality and financial crisis, and to vote in a

socialist government would be to throw the baby out with the

bath-water; to shut Pandora’s box before hope emerges Liberal capitalism

has proved its worth Few now dispute that free markets protected by

vigilant antitrust and other forms of regulation are the best system for a

society that places a high value on economic well-being

Vigilant regulation is vital, because there are worms at the cores of

free markets Sir Karl Popper’s “paradox of democracy” was that when

democracy is too free, tyranny can emerge When markets are too free,

monopolies, inequality and financial instability can and do emerge

Political, economic, biological and other complex systems all have

fundamental flaws of this kind; seeds of their own destruction, in

subsys-tems, tendencies and propensities, which, like cancers, can grow out of

control and suborn, take over or otherwise jeopardize the survival of

their host systems That’s why liberal democracies need constitutions

and markets need regulation

Recent events and developments suggest liberal capitalism harbors

two dangerous seeds of self-destruction; growing inequality, which

undermines the political consensus that sustains the system, and a

tendency for markets to spiral out of control The economist, John

Maynard Keynes, suggested that economic activity was partly driven by

alternating waves of irrational optimism and pessimism Some 70 years

before the 2007 subprime crisis Keynes said, in The General Theory of

Employment, Interest and Money, most of our decisions “to do

some-thing positive … can only be taken as the result of animal spirits – a

spontaneous urge to action rather than inaction, and not as the outcome

of a weighted average of quantitative benefits multiplied by quantitative

probabilities.” Some suggest it’s these animal spirits, their effects

magni-fied by positive feedback from self-fulfilling prophesies, that drive

business cycles

It’s up to us to ensure these seeds of self-destruction in liberal

capi-talism are brought under control

My prescription is reculer pour mieux sauter; to step back to jump

forward more strongly We need to turn liberal capitalism’s clock back

to a time before its seeds of self-destruction began to take over

Evolution in nature sometimes works this way in a process known as

“neoteny” (“holding youth”) We are the creatures of neoteny Our

rounded, bulbous cranium containing our large brain resembles that of

a foetal ape Subsequent ape brain growth is slower than ours, so the

cranial vault is smaller and lower in an adult We acquired our large

brains by retaining rapid foetal growth rates

The human face – distinguished from the faces of other primates by

its straight profile, small jaws and teeth, and weak brow ridges –

resem-bles the face of a juvenile ape The resemblance fades as the ape’s jaw

grows, relative to the rest of the skull, to produce the adult ape’s muzzle

The foramen magnum, the hole in the mammalian skull from which the

spinal cord issues, is underneath our skull, pointing downwards, as in

the embryos of other mammals This means we look forwards, when we

stand upright As other mammals mature, the foramen magnum rotates

and ends up pointing backwards, so that the animal looks forwards

when standing on all fours

The Microsoft Windows operating system incorporates a reculer

pour mieux sauter option If your computer keeps crashing, or begins to

run agonizingly slowly, because it has acquired viruses, worms or other

internet pathogens, System Restore allows you to restore the machine

to a previous known working state Files and data, such as

word-processing documents, spreadsheets, music and images, remain intact,

but the operating system itself reverts to its state at an earlier time,

before things began to go wrong

We must do a System Restore on liberal capitalism

Something of the kind has already occurred in the new regulations

for banks and capital markets following the 2008 financial crisis In a

sense, they have restored liberal capitalism’s financial subsystem to its

mid-1980s state, before the deregulation and subsequent globalization

of the financial services industry

This book advocates the reformation of another creature of liberal

capitalism, the large, limited liability joint stock company, some of the

features, practices and appetites of which I believe lie at the heart of

liberal capitalism’s malaise

In their new “global” guise these institutions appear to exemplify

liberal capitalism They are the overwhelmingly dominant business

organizations, and most of us are directly or indirectly employed by

them They seem to be integral to liberal capitalism, or at any rate

capi-talism The system seems inconceivable without them

So prominent and powerful are they that it is easy to forget their

relatively recent origins The company as we know it, only assumed its

modern form in the mid-19th century and remained a minor player in

business until the early 20th century But since then, this form of

enter-prise, cobbled together with a structure borrowed from the military,

practices and habits inherited from mercantilist trading companies, and

hungers derived from the entrepreneurial businesses and partnerships

that drove the Industrial Revolution, has been astonishingly successful

The modern world is in many respects its creature

But it has begun to show clear signs of decadence

Enron, WorldCom, Tyco and Parmalat are a few of the names that

had tainted the reputation of “big business” with a whiff of fraud and

corruption long before the big crash These scandals led to the

Sarbanes-Oxley Act in the U.S., and similar laws and codes of practice elsewhere

That such regulations were deemed necessary in nations wedded to

laissez-faire economics reflected a concern that, when left to their own

devices, big companies tend to behave badly and it was, therefore,

necessary to curtail their liberty

The generally more critical view of business has also been evident

recently in the accusations by governments, fiscal authorities and

commentators that companies that engage in aggressive tax planning

(tax avoidance, the opportunities for which have been increased by

globalization and tax competition between national governments for

foreign investment) are behaving unethically, and not paying their dues

to the societies in which they operate

But much the clearest and, in my view, the most worrying sign that

the large, publicly listed, limited liability, joint stock company has entered

a decadent stage where its behaviour is diverging from commonly

accepted standards, is the executive pay explosion Let us be clear about

this issue from the outset There is no remotely conceivable justification,

economic or otherwise, for the CEOs of our largest companies to be

paid several hundred times the average pay of their employees

I imagine readers gasping in disbelief Surely this is a typing error?

But no At the top of the bull market in 2000, the CEOs of the 500

largest U.S companies were paid (“earned” is entirely the wrong word)

on average over $500,000 for every $1,000 paid on average to the rest

of their employees The subsequent market crash (a minor blip,

compared to what was to come later), and new reporting rules requiring

companies to account for stock options as expenses, led to a brief

reduc-tion in the multiple subsequently, but the average multiple for Fortune

500 companies was 350 in 2005, and rising

There’s a furtiveness about executive pay Like a spider caught in the

light, it freezes and sometimes even retreats, when it becomes a focus of

attention, but creeps up again when no one is looking It froze and

retreated after the 2008 crash, in response to public outrage at the huge

severance packages and pensions paid to former CEOs of banks who

had bet the farm on subprime debt

CEOs are not stupid They can’t possibly believe they are actually

worth what they’re paid They know there’s no link between CEO pay

and corporate performance So why do they demand such enormous

pay packages and, more importantly, why do their shareholders accede

to their demands? These questions lead directly to the rottenness at the

core of the modern corporation But greed isn’t the answer To explain

the CEO pay explosion as a consequence of insatiable human greed is

to miss the point entirely

CEOs aren’t abnormally greedy They simply accept the good

fortune that has brought them to a place where huge rewards are there

for the taking, ignore protests in the popular press about troughing and

fat cats and try to ensure that their pay remains competitive As one

German CEO, relatively lowly paid by Anglo-Saxon standards, is said to

have put it: “I know I am overpaid, but the benchmarks say I’m not

overpaid enough.”

It is an institutional greed; a product, not of human avarice, but of the

way hierarchical corporate organizations concentrate power in the hands

of individuals and create a “CEO class” isolated from market disciplines,

where remuneration is decoupled from work and economic value added,

and CEO pay packets chase each other upwards in a never-ending spiral

Let us be clear about another thing from the outset Pay and power are

inextricably linked It would make no sense for shareholders to pay their

CEOs huge amounts of money if they didn’t also assign to them huge

amounts of power Only omnipotence can justify modern CEO rewards

and omnipotent CEOs can’t pass the buck when things go wrong

The consequent emergence of what are in modern times

unprece-dented inequalities of power, income and wealth, marks the beginning

of a new and alarming chapter in the evolution of liberal capitalism I

will argue that, fortunately for liberal capitalism, the explosion in

execu-tive pay is not a natural outcome of the system It is an aberration that

can be corrected It must be corrected, because it is the Achilles heel of

modern capitalism It is so obviously and so offensively unfair that, if it

continues, the sense of fairness and justice that sustains the liberal

democratic consensus will be undermined

Growing inequalities within liberal capitalist societies and their

business organizations undermine not only the general consensus on

which these societies rest, but also the countless contracts of

employ-ment and association that comprise that consensus

Partly because of the executive pay explosion, modern companies

are seen by their employees and prospective employees as profoundly

unfair organizations that do not recognize or reward ability and

dili-gence proportionately Why this should be so is something of a puzzle

Institutions that compete with each other in a free market should realize

the vital importance of paying fair rates for goods and services rendered,

and the market itself should penalize those that don’t But disparities in

pay – between men and women, ethnic groups and, most

conspicu-ously, between middle and senior managers and “C-level” executives

(CEO, CFO, COO, and so on) – persist Whatever the reasons for

them, these huge disparities in income are seen as unfair and hang like

dark clouds over company cultures, breeding resentment in those who

have to get by on a tiny fraction of their leaders’ incomes

It is not the fact of differences in pay that is controversial; it is the

extravagance It is simply impossible for reasonable people to believe

that their CEOs, several of whom are sacked with multi-million-dollar

severance packages each year for incompetence and who, as a breed, are

notorious for destroying shareholder value by paying too much for

acquisitions and – in their pursuit of targets linked to their incentive

plans – for taking too many risks, could be worth such huge rewards

The second problem, related to the first, that people have with large

companies, is the deterioration in the so-called “work–life balance.”

Working for large, complex organizations has always been demeaning,

since Henry Ford turned his employees into cogs in a machine More

recently it has also become intolerably demanding In today’s intensely

competitive business world CEOs have to crack the whip harder and

harder to get their numbers to the point where their incentive plans kick

in The result is that it is becoming difficult, if not impossible, for

ambi-tious managers to maintain a full and fulfilling family and social life

It is here, in the unfairness of large companies and the excessive

demands they make on employees, that the System Restore, reculer

pour mieux sauter possibility lies People voting with their feet, moving

from one kind of organization to another, is the engine of the evolution

of the corporate form For lack of anything better, we have put up with

the unfair and demanding organizations most of us work for, but we are

unlikely to do so for much longer People, particularly those

exception-ally able people large companies fight tooth and nail with each other to

employ in the so-called “war for talent,” are now realizing that recent

technological, economic and social changes give them more options

Nowadays, they can leave organizations in which they feel

uncom-fortable with less fear of becoming destitute and they can form, join or

become associated with smaller, looser organizations that offer them

work and types of association that suit them better

Once their economic needs have been met people will seek the kinds

of work and types of association that appear, to them, most likely to

satisfy their emotional needs and particularly their hunger for

self-respect I believe it is this human hunger for self-respect, rather than

globalization or technological change, that is driving corporate

evolu-tion Like natural forms, corporate forms co-evolve with the

environ-ment in which they compete for resources Now that able, hard-working

people, the most important business resources, realize they have choices,

they will leave organizations that deny them self-respect

This book explains why capitalism’s main economic agent, the large

CEO-led, limited liability joint stock company, is in dire need of

funda-mental reform and suggests some steps companies could take to improve

their adaptation to today’s environment It focuses on the U.S and the

U.K., because it is in these countries that the problems are most acute,

and the decadence of companies is most advanced

There are three protagonists in my story The first is the company

that wants to hire able people who respect themselves, because it knows

they are more self-confident and creative than wage slaves The second

is the individual who, as a voter, wants a society that is fair as well as free

and, as a worker, yearns for a career that is fulfilling and rewarding

without demanding so much commitment that she or he feels

inade-quate as a partner, parent, friend and human being The third is less

easy to describe It is the modern company’s as yet inchoate nemesis –

the new breed of enterprise that will challenge and possibly replace the

company if it fails to reform itself

The first step in a System Restore process is to choose an earlier date

to which to return the system or institution This is no easy task because,

although the problems themselves (the unfairness and excessive demands)

are clear enough, their causes are shrouded in the mists of the past We

must go right back to the origins of the institution itself to understand

what corporations are and why and in what ways they became decadent

There is no mystery about why trade and business developed It was

because there are synergies in exchanges of goods and services, and

econ-omies in specialization Business organizations were developed to conduct

business and trade, because there are economies in the coordination of

business activities and synergies in cooperation between specialists

But there is no ideal business form or model of association Forms

and types of association emerge in response to new challenges and will

fall into disuse when changes in their environment make them less “fit”;

when their initial virtues become, or are replaced by, vices Each form

has what evolutionists call a unique “environment of evolutionary

adaptedness” (EEA) and tends to become less fit as its current

environ-ment diverges from its EEA

Today’s dominant form of business organization emerged in

response to the environment of the late 19th century, so it’s no surprise

it has run into trouble in the environment of the early 21st century

Much has changed over the past 150 years Markets have become more

efficient, a global economy has emerged and new technologies have

changed the nature and intensity of competition, and created space for

new enterprise experiments and business models

Most important, the attitudes, outlooks, aspirations and emotional

needs of able individuals have been changed profoundly in the past two

decades or so by important social and economic developments These

include the unilateral repudiation by most employers of the old “loyalty

for security” psychological contract (keep your nose clean and close to

the grindstone, and you have a job for life); the re-emergence of the

market rather than the organization as the mechanism for valuing

human worth and allocating human resources; the opportunities for

self-employment created by the internet and the disaggregation of

business through outsourcing and other kinds of association; and more

recently, the sea change in the perceived cost–benefit profiles of

employ-ment, versus self-employment caused by the recession (Recessions

always eject large numbers of people from companies and not all of

them return when growth resumes.)

The importance of these changes lies not so much in themselves, as

in the options they offer able people to satisfy their hunger for

self-respect Just as slaves and serfs had to resign themselves to their status

when there was no prospect of freedom, so wage slaves raised no

objec-tions to their economic serfdom when there was no obvious alternative

People are beginning to realize that there is an alternative now

Econ-omic serfdom has become voluntary

The human hunger for self-respect has led to the gradual diffusion

throughout the world of a system of government we call liberal

democ-racy It has been a slow process and, even now, liberal democracy is not

universal But the trend is clear and it seems for the most part to be

irreversible Self-respect is a “primary good,” as John Rawls1 called it,

and history suggests that, in the political arena at any rate, it’s

maxi-mized for the mass of ordinary people within a liberal democracy

This same hunger for self-respect requires changes in the forms of

organization and the types of association in which, and with which,

people will come together in future to combine their talents and

abili-ties in concerted efforts to create wealth

This book has two parts The first six chapters focus on what ails big

business The final four chapters focus on what can be done to reform it

Part I, “What ails big business,” begins in Chapter 1 with an

invita-tion to readers to redesign work; to ask themselves how, in an ideal world,

they think work should be managed or organized and how, in an ideal

world, they think that the rewards for work ought to be distributed

Armed with the model extracted from this thought experiment of

the working arrangements most people want, I shall explain, in Chapter

2, why they have so far been denied such arrangements My approach is

evolutionary To understand how we have got to where we are, we must

return to the origins of business and its organizations, and retrace our

steps back to the present Such an exploration of the antecedents of the

modern corporation leads us, I will suggest, to the conclusion that one

reason why today’s dominant corporate form differs from the form

most people want is because it is adapted to an older environment

In Chapter 3, the adaptive pressures on the corporation created by

the differences between its EEA in the mid-19th century and today’s

environment are examined in more detail I will suggest that many of

the corporation’s original advantages are either less valuable now or

have become disadvantages, and the conventional company has thus

become vulnerable, in principle, to the invasion of its niche by other,

better adapted variants

The conventional corporation has become vulnerable, because it has

not changed; has not adapted adequately to changes in the business

envi-ronment It has also become vulnerable in another way, because it has

changed – changed for the worse Chapter 4 explains how the decadence

of the corporation, exemplified by the seriously bizarre sums of money

paid to executives, threatens the liberal capitalist system that sustains it by

undermining the consensus that sustains liberal capitalism

Chapter 5 investigates the causes of this decadence and attributes it

not so much to the standard explanation, greed, as to a serious inefficiency

in the market for senior executives caused largely by the pyramidal shape

of modern corporations I will argue that this shape is so deeply embedded

in modern business culture that no one questions its implicit presumption

that, to be successful, a large company requires an exceptionally able and

charismatic leader The consequence of this standard, hierarchical model is

that power and pay are invariably drawn, as if by a siphon, to a CEO space

at the top insulated from normal market disciplines

Some will argue that there’s another, more prosaic reason for very

high levels of CEO pay; namely that CEO work is very difficult and

demanding, those who can do it well are as rare as hen’s teeth and their

pay simply reflects the market clearing rate for these “rare skills.” Chapter

6 challenges the assertion that the CEOs of large corporations are really

worth their weight in gold every year The role of luck in business success

is discussed, various CEO “agency costs” are examined, and the extent to

which others, including the company’s workforce as a whole and outside

consultants, contribute to the successes for which only the CEO is

rewarded, is explored

Part II, “Reforming big business,” begins in Chapter 7 with a

discussion of some roads not taken in the evolution of enterprise, which

could have led to a different place These discarded threads of

possi-bility are developed, with the help of complexity theory, into an

exam-ination of the prospects for leaderless enterprise, of the kind exemplified

by the Linux software system and Wikipedia This is my third

protago-nist – the multi-agent business enterprise; the challenger – the nemesis

of the conventional CEO-led company if it fails to adapt

Chapters 8 and 9 each focus on a particular adaptation open to the

CEO-led company; appointing more women to senior positions, and so

moderating the masculine corporate persona which has become such a

liability recently, and reducing CEO omnipotence, by entering into

more business partnerships

Finally, in Chapter 10 I sketch out the elements of a “System

Restore” procedure for the large company My main argument is that

corporations should become more sensitive to their environment; to the

hunger of their employees for self-respect; to the demands of those who

shape their political environment for fairness, openness (or

“transpar-ency” as modern parlance has it), decency and an acknowledgement of

social and environmental responsibilities I am a great believer in the

power of simple rules (for compensation in capital markets, for instance)

to steer, channel or nudge people and companies in desirable directions

By adjusting, tuning and thoughtfully tinkering in this way we can

create new background conditions that will encourage companies and

their leaders, if leaders there must be, always to behave in ways that

maintain economic and financial stability, and the essential political

consensus that sustains the system of liberal capitalism from which

companies derive their licences to operate

Liberal democracy and its economic system, capitalism, is the best

system for creating and maintaining free and prosperous societies so far

devised It would be a tragedy if the decadence of its main business

institution led us, as voters, to abandon it and exchange some of our

freedoms for the promise of a fairer society

The large CEO-led joint stock company can and must be reformed

Reference

1 A Theory of Justice, Harvard University Press, 1971.

What ails big business

The most challenging long-term problem facing companies is not the

speed of change, although that’s relentless; it is not the growing

complexity of business and finance, although that is becoming more

convoluted by the month; nor is it the risks that complexity brings with

it, although, as the crash showed, they are horrendous It is not disruptive

new technology, although that is coming thick and fast; nor the

capri-ciousness of customers, although they’re becoming less and less

predict-able; neither is it competition, although that’s intensifying all the time

All these certainly add to the difficulty of the modern management

problematique, but all pale into insignificance beside the problem

modern businesses have with people; or rather, to put it the right way

round, the problems people have with modern businesses Work can be

enjoyable, fascinating, satisfying, and enriching, both intellectually and

materially At the best of times, it’s a source of peak experiences, firm

friendships, and illuminating insights into how the human psyche,

including your own, and the world work It can give meaning and

purpose to life It can bring out the best in people It can be a rich

source of self-respect

But there’s also the frustration when you are told to do something

you think is wrong or prevented from doing what you feel is right; the

humiliation when less able people are promoted and you’re not There

is the unfairness; the bureaucracy; the regimentation; the excessive

demands; the shame when your company behaves unethically or

unkindly; the sense of powerlessness when the leader reassigns roles and

tasks without consulting the people affected, or, on the advice of a few

smart “here today, gone tomorrow” consultants who don’t seem to

know their arses from their elbows, implements a new strategy any fool

can see will be disastrous

Because large companies need specialists, people tend to get stuck in

departments or roles that seemed interesting and challenging to begin

with, but turn out to be backwaters Others languish in the ghettos of

“non core” or “pink collar” support functions, far from the mainstream

Many feel they are paid less than they’re worth or that they are going

nowhere, because the powers that be appear to value political skill more

highly than business competence

How many middle managers can honestly say they do not

occasion-ally resent the fact that their so-called leaders, who often seem to be

reckless or breathtakingly incompetent, are paid hundreds of times

more than they are, or have not thought to themselves, “I’m outta

here!”, but have buttoned their lips in the interests of those who depend

on them?

Companies are made by, but not for people There is always tension

and often open conflict between the interests of the organization, and

the interests of its employees If you are the Chief Executive Officer

(CEO), things are different, because you have “powers of sovereignty”

that your employees lack But even you may feel the demands of the

market and of your investors are unreasonable, and that you have been

treated or judged unfairly

Some companies are better places to work than others, but there is

no denying that many are seen by their employees these days as being

illiberal, unfair, callous, irresponsible, and presumptuous in the demands

they make on the time of those who work for them This may help to

explain why there’s so much talk now about an epidemic of

work-related stress

A 2000 European Working Conditions Survey found that

work-related stress was the second most common work-work-related health

problem in the European Union (EU), after back pain It has been

linked to cardiovascular diseases, musculoskeletal disorders, particularly

back pain, and the so-called RSIs (repetitive strain injuries), as well as to

absenteeism

It occurs when workers are presented with work demands that

exceed their knowledge, skills or abilities, such as time pressure or the

amount of work, the difficulty of the work or an inability to show one’s

emotions at work

Time pressures at work have been growing According to a report by

the European Foundation for the Improvement of Living and Working

Conditions, the percentage of employees working at very high speed

rose from 48 percent in 1990, to 56 percent in 2000 The report also

found that, of those working continuously at very high speed, 40

percent suffered stress, compared to only 21 percent of those who never

worked at very high speed.1

Causes are linked to the work itself: such as work demands and the

lack of freedom to control one’s work (autonomy); combinations of

high demands and low autonomy; and combinations of high efforts and

low rewards; and the individual’s characteristics, such as an inability to

cope with pressure Stress is particularly strong when an employee’s

autonomy is threatened Fear of underperforming and of its

conse-quences causes anxiety, anger, and irritability

Stress is more likely in people who tend to be over committed to

their work, and lack self-confidence Stress is less likely if the employee

has a high degree of control over his or her work, and if the work

requires a variety of skills

OK, so work-related stress is one of those ailments that tend to

become more common when they are named But there is no doubt

work became more stressful after the unilateral repudiations during the

downsizings in the early 1990s of the old “loyalty, for security”

psycho-logical contract, that the 24/7 rhythm of today’s companies and

inten-sifying global competition have increased work pressures, and that the

lack of a work–life balance puts hapless employees between the rock of

insatiable work demands, and the hard place of family responsibilities

It is not so much hard work itself that causes stress, as the lack of

autonomy, and the inability of the employees of large, CEO-led

compa-nies to set their own work rhythms and pace This may go some way

toward explaining why, according to U.S Census Bureau figures, the

number of non-employers (mostly self-employed people and small

unincorporated businesses) rose by over 35 percent to 21 million

between 1997 and 2006, compared to an increase of less than 14

percent to 120 million in the numbers of company employees

The contract between employer and employee increasingly favors

the former, and is thus becoming less acceptable to the latter A new

contract is needed, which acknowledges the hunger of employees for

self-respect both at home and in the workplace

Self-respect is a primary good

Francis Fukuyama suggested, in his book The End of History and the

Last Man,2 that the prime movers in the human journey to what he

argued was the political end-state of liberal democracy, were the

superi-ority of liberal economics and the human desire for what he called

“recognition.”

Our desire for recognition was identified by Plato in the Republic

where he argued the human soul incorporated a “desiring” part, a

“reasoning” part and thymos (“spiritedness”) “Desire induces men to

seek things outside themselves,” Fukuyama explained, “reason … shows

them the best way to get them But in addition human beings seek

recogni tion of their own worth, or of the people, things or princi ples

that they invest with worth.” Fukuyama sees thymos as a desire for

self-esteem and as an in nate sense of justice:

People believe that they have a cer tain worth and when other people

treat them as though they are worth less than that, they experience

the emo tion of anger … when people fail to live up to their own

sense of worth, they feel shame, and when they are evaluated correctly

… they feel pride The desire for recognition and the … emo tions of

anger, shame and pride are parts of the human per sonality

Hegel saw history as man’s “struggle for recognition.” Machiavelli

wrote of man’s desire for glory Hobbes recognized the importance of

pride Rousseau originated the term amour propre Nietzsche noted

physiological evidence of our need for self-respect, by describing man as

a “beast with red cheeks.”

You do not have to subscribe to Fukuyama’s “end of history” theory

to recognize the existence within yourself of thymos; a hunger for

recog-nition and self-respect John Rawls said self-respect was the most

impor-tant “primary good.” He defined it as follows:

First of all … it includes a person’s sense of his own value, his …

conviction that his … plan of life is worth carrying out; … second,

self-respect implies confidence in one’s ability to fulfill one’s

inten-tions When we feel that our plans are of little value, we cannot

pursue them with pleasure, or take delight in their execution Nor,

plagued by failure and self-doubt, can we continue in our endeavors

It is clear then why self-respect is a primary good Without it

nothing may seem worth doing, or if some things have value for us

we lack the will to strive for them All desire and activity becomes

empty and vain, and we sink into apathy and cynicism.3

Rawls built his philosophy of “justice as fairness” on the primary

good of self-respect; Hegel saw the struggle for recognition as the

engine of history Fukuyama saw the hunger for self-respect as one of

the drivers of the evolution of human societies toward the political end

state of liberal democracy

But although the human hunger for self-respect has been a powerful

stimulus of social and political developments, it is too general a hunger

on which to build, as I will try to do, a new framework for business

organization We need to unpack it a little, to derive a list of workplace

qualities, the presence or absence of which will increase or reduce the

chances that those who occupy it will learn to respect themselves

Let us start with a thought experiment Readers are invited to put

themselves in a workplace version of Rawls’s “original situation,”

behind a “veil of ignorance,” where they know nothing of their own

characters, abilities and attitudes to risk, and nothing about the world

of work they’re about to enter, apart from knowing that work they

must, to provide for themselves and their families

What workplace qualities would you regard as desirable? Forget how

things are, and how it seems they must be, and try to imagine, in general

terms, which among all conceivable workplace qualities and

arrange-ments you, given the choice, would choose for yourself

If John Rawls had been asked this question he might have concluded

that, behind the veil of ignorance, most of us would say we wanted our

workplaces to be “free,” “fair,” “reasonable” and “decent.”

Free

We are constrained by the organizations that employ us, and by our

need for the money they pay us We have to sacrifice and suppress parts

of ourselves for the sake of our employing organizations and our careers

We are compromised by our employment, because it can prevent us

from realizing our potential, by obliging us to follow only those paths

our employers lay out for us, and take only those opportunities they

make available to us We may suspect that, in different circumstances,

we could have developed in very different ways and discovered in

ourselves different talents and abilities, the development of which might

have satisfied us more, and made us feel more fulfilled But we are

trapped by our situations, and the passage of time We might be proud

of our achievements so far and excited by the opportunities open to us,

but we can never be sure that the person we have become, and can

become, is the best of the persons we could have been, or could become

We can never be sure of that of course, but we know our chances of

realizing our potential and maximizing our self-esteem depend, to a

large extent, on how open our circumstances are; on how free we are to

change our situations We value freedom highly, because the freer we

are, the greater the chance we will find places where we can shine and

become fulfilled We know luck plays a large part in determining where

we end up, and how we feel about ourselves, but, more and more

nowadays, we are attracted to open situations in the middle, rather than

on the banks of the river of fortune

In other words, we are attracted to situations where our fates are not

set in stone and, thus, to relatively “liberal” organizations, that seem

less likely to trap us in narrow specialties, or typecast us, on the basis of

what we are, or have been, at the expense of what we will or could be

We want to work in organizations that offer us a wide range of

oppor-tunities; that see us as developing individuals; that don’t try to

brain-wash us into believing in them more than in ourselves; and that respect

our need for self-respect, and the freedom to experiment, and to test

ourselves in various roles and working arrangements

Fair

Fairness is a sine qua non of a just society Although what’s fair in a

particular situation is sometimes hard to divine, most of us recognize

with our emotions situations in which issues of fairness arise We may

feel anger, outrage or indignation, depending on the circumstances,

when it seems to us that we or others we care about are treated unfairly

and most of us abhor favoritism, nepotism and cronyism

The sense of what is fair and unfair is deeply rooted in us Young

children become aware of the concept of fairness at an early age They

may not understand its full social implications until later, but their

tantrums and frustrations, even when ignited by selfish hungers, are

expressed with a stamp of the foot and the cry: “It’s not fair!”

Fairness is as vital in our psychological development as oxygen is in

our physiological development, and it’s an essential background

condi-tion for a peaceful and harmonious society This human hunger for

fair-ness has led to the rise of liberal democracy and to its current position as

the world’s dominant, though not yet universal, system of government

The modern workplace is not a fair place and the company is an odd

kind of institution to have survived for so long in a world where liberal

democracy is, or, at any rate, is becoming, the standard political system

In political terms an institution in which power is vested in a single

individual is a living fossil – a throwback to feudal times

Some say the company would not work as a liberal democracy, and

it would be absurd if CEOs were elected by employees, or were obliged

to put their strategies and policies to employee votes But if, as history

suggests, human beings have this innate hunger for liberal democracy in

their political lives, they’re unlikely to settle, in the long term, for

anything less than its equivalent in their work lives

I’m talking here of the long-term evolutionary trend, not imminent

upheaval The “democratization” of companies is inevitable, but it will

come about, not suddenly, through employee coups d’état, but

gradu-ally, through the migration of able people from tyrannical to more

democratic organizations

We are the agents of the evolution of working arrangements Things

will change because we have needs, and will take our talents, and the

competitive edges associated with those talents, to workplaces and

organizations that can best satisfy those needs

Others say the constituents of a company are its shareholders, not its

employees In a legal, formal sense, of course, they are quite right But

to deny political rights to employees, because they are not shareholders,

is to behave like the Athenians when they denied political rights to

slaves, because they were not citizens

One does not have to subscribe to the “stakeholder” concept of the

company to acknowledge that, although a company’s employees cannot

hold its executives to account in the same way as shareholders, a company

will get into trouble if its executives fail to take into account their

employ-ee’s political needs and desires, particularly their desire for self-respect

It seems highly unlikely that employees will continue indefinitely to

allow workplaces to be controlled by external shareholders The

polit-ical equivalent would be heterarchy (rule by an alien) Once again, the

transfer of power from external shareholders (who have, in any case,

delegated most of their power to their CEO) will come about, not

through the reform of existing corporate constitutions, but through the

gradual migration of talented and competent people from conventional

companies, controlled by the agents of external owners, to companies

majority owned by their employees or companies with more

employee-orientated constitutions

Reasonable

The recognition that, in addition to formal constitutional matters such

as who owns the company and has rights to its free cash flow, there are

practical constitutional matters, such as the likelihood that good people

will leave if they believe they are being treated un fairly, has led to an

interest in constitutional issues, such as just and fair procedures It has

been suggested, for example, that employees will only comply with

deci-sions that are disadvantageous to them, when they feel those decideci-sions

were reached in a just way after full consultation with those affected

Procedural justice is necessary, but not sufficient Other aspects of

justice, including fair rewards for work (of which much more in Chapter 4)

also influence the extent to which employees regard the company’s

proce-dures, processes, assignments and distributions (of power, status and

reward) as fair To minimize the risk that their good people will leave,

because they find the company’s political atmosphere obnoxious,

frus-trating or uncomfortable, managers would be well advised to look

beyond the management debate, to the wider discourse of political and

moral philosophy

In The Law of Peoples 4 John Rawls applied the two “principles of

justice” he had set out 28 years earlier in A Theory of Justice to

interna-tional relations The later book, which includes a restatement of his idea

of public reason, has nothing directly to do with management, but

includes two related ideas of interest to managers who want to create

and maintain a fair political climate

The first is the distinction between “peoples” and “states.” Rawls

defines a “people” as being united by a common outlook on life This

differs from a “state,” in that it lacks a state’s “powers of sovereignty,”

including rights to wage war and govern its people

The same distinction can be drawn between the people employed

by a business and the person who leads it The fact that a company is

a people, as well as a state, is important, because a people may not

always see eye to eye with the state it comprises The company, as a

people, cannot bid for or form an alliance with another company, for

instance, open or close plants or branches, downsize, raise new capital,

or devise and implement a strategy These are “powers of sovereignty,”

and are the prerogatives of the leadership, which embodies the

company as a state

But although mergers, acquisitions and alliances, for example, are

brought about by the leadership, whether or not they create value for

shareholders depends partly on whether the “peoples” involved find a

value-creating modus vivendi Unlike shareholders, employees cannot fire

leaders who make bad acquisitions, but they can quit, refuse to cooperate

or actively obstruct post-merger integration, and so help determine whether

or not the acquisition creates value for the acquirer’s shareholders

The other idea in The Law of Peoples that should be of interest to

companies is the distinction between “rational” and “reasonable.”

According to Rawls, the difference between a state and its people:

rests on how rationality, the concern with power, and a state’s basic

interests are filled in If rationality excludes the reasonable (… if the

state is moved by the aims it has and ignores the criterion of

reci-procity in dealing with other societies); if a state’s concern with

power is predominant and if its interests include such things as

converting other societies to the state’s religion, enlarging its empire

and winning territory, gaining … prestige and glory, and increasing

its relative economic strength – then the difference between states

and peoples is enormous Such interests as these tend to put a state

at odds with other states and peoples, and to threaten their safety

and security, whether they are expansionist or not

Suppose a company has to move its offices The “rational” approach

would be to instruct a relocation consultant to find the cheapest

premises that fulfill certain criteria for quality, facilities, logistics and so

on A more “reasonable” approach would be to move to an area that

minimizes the travel times of employees In a company where the

second, reasonable approach seems natural, there may not be much

difference between the company as a state, and the company as a people

In a company where the first approach is preferred by the leader

(embodying the company as a state), where the leader’s “rationality”

excludes the “reasonable,” ignores the interests of employees

(embod-ying the company as a people), and other companies and their employees,

and is driven by the leader’s interests, such as a desire for enlargement,

prestige and wealth – the differences between the company as a “state”

and the company as a “people” may be enormous

Interests such as these tend to put a company at odds with its own

employees, and with other companies and their “peoples.” They lead to

rational, but unreasonable behavior, such as predatory pricing and

buying, late payment of suppliers’ invoices and other abuses of market

power, and threaten the solvency of other companies, and thus the

live-lihoods of their employees

In other words, a decision by a company to acquire another company

or to pay its invoices late, as a matter of routine, in an effort to appropriate

more than its fair share of trade credit, could be “rational,” in respect of

the firm’s own, basic interests, but is “unreasonable” in respect of the

interests of its people and other companies and their peoples Peoples

have basic interests, such as security, safety, fair rewards and the freedom

of their members to pursue their ambitions and realize their full potential,

but these interests are confined to those that are “reasonable.”

The implications of the difference between reasonable and rational

behavior go far beyond fair processes One implication is that the

compa-ny’s political climate will be determined, in part at least, by whether

employees (embodying the company as a “people”) regard the behavior

of the leader (embodying the company as a “state”) as reasonable

Some will argue that employees cannot be expected to understand or

be moved by the need to buy market share, or downsize; that they are not

privy to the relevant information, or capable of grasping the thinking that

makes such actions “rational”; and that it’s not their place to judge the

ways in which their leaders wield their powers of sovereignty

But whether or not they can grasp the rationale for their leader’s

course of action, and whether or not it is their place to question it,

question it they do, according to what they view as reasonable in respect

of their own, basic interests And they will be hard to lead if they believe

their leader is behaving unreasonably

The political climate that helps to determine employee loyalty and thus

the Key Performance Indicator of labor turnover, can also be affected by

high levels of top executive pay In an allegedly very competitive market for

executive talent, it may be “rational” (or not, see Chapter 5) to pay the

CEO 300 times more than the average middle manager, but it is unlikely

to appear “reasonable” to the average middle manager, particularly if the

reward for a CEO’s failure is a multi-million-dollar “golden parachute.”

I will return to the issue of fair rewards later My point here is that a

political climate cannot be just if it denies the right of employees to

self-respect An average middle manager is willing to accept that a talented

executive should be paid considerably more than him or her, but it’s

hard for anyone to accept that he or she is worth barely 0.3 percent of

another manager, however talented It is not, or not only, a matter of

envy Most people admire successful entrepreneurs and many seek to

emulate them It is more a question of perceived justice and the effect a

perceived injustice has on the self-respect of its victims

It’s true that progressive income tax rates reduce the disparities in

net income and, therefore, contribute to distributive justice But it is

the gross income of the CEO which is so often seen to be “gross,” and

which thus exerts the most influence on the political climate of the

company she or he leads

It is hard to quantify the effect of a company’s political climate on

the loyalty of its employees, but it is also hard to believe it is

negli-gible and when there is a “war for talent,” all dimensions of

attrac-tion are important

Decent

A broader definition of reasonable behavior includes behavior that

abides by normal ethical standards and accepts responsibilities to society

at large Rawls called such behavior “decent.”

I have written elsewhere about the value of a company’s reputation

for behaving ethically and being seen as a good employer, customer and

corporate citizen.5 But my prediction that most companies would

recognize the value of reputational assets and try to create and preserve

them has not been realized Big companies are “nicer” than they were

in some ways, but partly because their leaders have become obsessed in

recent years with the quintessentially rational logic of finance, many are

still behaving “rationally” rather than “reasonably” and incurring

repu-tational liabilities as a result

One day in spring 2001, big business had a particularly rough ride in

the press Chocolate manufacturers were taken to task for not using

their influence on suppliers to eradicate child slavery in cocoa

plan-tations, pharmaceutical giants had to abandon a lawsuit they had begun

in South Africa, to protect their patents on anti-Aids drugs and a leading

oil company faced criticism at its annual meeting for alleged

exploita-tion in Sudan

The pressure groups that find fault with global companies and urge

them to behave more “ethically” are not always articulate or well

informed In the case of the drug companies, however, it was clear that

the rational insistence of the companies’ leaders that their intellectual

property rights must be protected in the courts, had prevented the

companies from doing what most people, including, no doubt, many of

their own people, saw as the “decent” thing; namely making their Aids

drugs available at a cost poor African countries battling with an alarming

Aids epidemic could afford

If the drug companies’ CEOs had realized that, although vigorously

protecting patent rights was rational, it was, and would be widely seen

to be, unreasonable to deny millions of poor people access to medicines

they desperately needed, and ignored the advice of their lawyers, their

reputations would have been greatly enhanced rather than gravely

damaged They did the right thing in the end, but you get no credit for

behaving decently under duress

How a company behaves affects its reputations with all its various

constituencies; suppliers, customers, partners and the communities in

which it operates But we are interested here in its reputation with

current and prospective employees Well-publicized attacks on a

company by pressure groups are sure to affect how the company is

perceived by employees, because employees are associated by others

with their employers’ reputations They will feel ashamed if their

company is accused of behaving badly, and angry when they believe the

accusation is justified People want to be thought well of by others

When others lose respect for the company you work for your own

self-respect is diminished People are attracted to companies that seem likely

to enhance their reputations and self-respect and will leave companies

that damage their reputations Whether or not employees understand

the reasons for their company’s actions, they will judge them, according

to what they regard as “reasonable” and “decent.”

Companies are not moral creatures, but people are, and companies

will find it hard to recruit and keep good people if they behave in ways

that seem to violate common standards of decency This is one of the

dilemmas faced by company leaders They have a duty to shareholders

to exercise their “powers of sovereignty” rationally, but their need to

retain talented staff obliges them always to act “reasonably.”

Power and powerlessness

Because talented people in business aspire to become leaders, they are

fascinated by the idea of “leadership” and enormous numbers of books

about leadership were, until recently, published every year It is

prob-ably no exaggeration to say the management discourse was little more

than an extended examination of the qualities, skills and tricks of the

trade of great business leaders, who, for want of better definitions, are

those who lead conspicuously successful companies

Books that purport to reveal the secrets of great business leaders are

compulsive reading for ambitious middle managers, but there is a

same-ness about them; the same heroes, the same qualities, the same

explana-tions, the same secrets and the same conclusions: if you want to be a

great leader, model yourself on Jack Welch, Bill Gates, Sir Richard

Branson, John Chambers (or whoever’s the latest leader role model)

Michael Brimm, a Francophile American who is Emeritus Professor

of Organization and Management at INSEAD, broke with this big

company leader tradition when he decided to study great French chefs

To most English speakers the French word “chef” means cook, but

it translates literally as “chief.” “Great chefs don’t cook anything

them-selves” Brimm told me “They direct organizations of up to 100 people

dedicated to achieving excellent performance, meal after meal Their

job is leadership.”

At first sight, chefs seem to be very bad role models for aspiring

leaders “When you walk into a kitchen” said Brimm, “you walk into

an environment that appears to violate practically every modern

management precept The chef is a dictator, barking out orders and

maintaining a rigid discipline There’s very little participation And talk

of ‘empowerment’ would be greeted with howls of derisive laughter by

the staff.” Most books on leadership urge managers to avoid criticizing

people, and to try to find something positive to say Chefs rarely praise

anyone explicitly

Why are people willing to work long hours in slave conditions, for

up to two years for next to no money under dictatorial leaders who

never praise them? “I have asked many kitchen staff that question” said

Brimm “They say they would even pay money to work with such chefs

They say they are learning so much that the ‘investment’ is certain to

help their careers.”

In other words, ambitious young people can work for a pittance, in

terrible conditions under tyrannical leaders, and yet retain their

self-respect, because they see the servitude as a rite of passage; an

appren-ticeship; a necessary step toward realizing their dreams of opening their

own restaurants Brimm says this dream is part of the kitchen culture

“Most chefs are very interested in developing people Because of the

hours they work they rarely meet, but when they do the talk invariably

turns to the people they’ve developed ‘Have you heard’ one may say

with pride, ‘François, who started in my kitchen, has just got his first

Michelin star?’”

Brimm’s study of chefs highlights the danger of generalizing about

“best practice” in leadership Most leadership books urge aspiring

leaders to praise generously and emphasize the positive The chefs of

top French restaurants do neither It is partly a reflection of the French

culture, in which “pas mal” (“not bad”) is high praise, but there is a

little more to it than that It is also a matter of expectation and

inter-pretation in the particular situation On one occasion, Brimm watched

the chef walk up to an apprentice who had just spent 15 minutes

completing a complicated garnish “The chef tasted the dish, and

emptied the plate into the garbage can saying ‘too salty.’ I went up to

the apprentice afterwards and asked him: ‘doesn’t it ever get to you

that you never get praise?’ He looked at me in astonishment ‘But I

do! Didn’t you see those times when chef walked by, tasted and walked

on without saying anything That was great praise He was telling me

that I had got it right.’”

Brimm says chefs deal in “successive approximations.” Because they

design the dishes, only they can judge whether the presentation is

appropriate and the taste has just enough salt or spice “The dish is their

creation, and they know when it is just right It is like the Japanese

master who teaches students, by asking them to copy a character he has

drawn Because it’s hard to describe exactly what is desired, the learning